Disappointing Employment News, the Extenders Bill, and Credible Fiscal Policy

Yes, today’s employment news from May is disappointing – even though there are some encouraging signs.

Let’s start with the bright side: the unemployment rate edged down (to 9.7% from 9.9% in April, a lot better than the 10.1% high of last October); job creation was positive for the fifth month in a row (it has been increasingly positive every month this year); and the job number was what we like to hear (+431,000). So, more people are working now.

However, a closer look at the numbers shows that the private sector job engine has not returned. Most of the new job creation in May reflected government-hired census workers (411,000 out of the 431,000 total). New jobs in private sector construction declined. Even more worrying, the number of discouraged workers remained very high and the number of workers staying in the work force (ie, those actively looking for jobs) declined, both signs of persistent and deep problems.

The job news raises questions about the strength of the fledgling recovery and the outlook in the more distant future. There is no doubt that we face serious immediate – even structural problems in our labor markets. Many people are out of work – and will be for a while.

At the same time, we have a public debt problem. We have limited or no fiscal space now to take on new public expenditures and then we are marching toward enormous public finance pressures by the end of the decade when retirement of the Baby Boomers starts to accelerate. With this picture in mind, financial markets will be none too happy if Congress passes bills that will simply increase the deficit. When OMB and CBO do their mid-year estimates of our fiscal house in August and September, the new numbers could be pretty ugly.

So, we are now between a rock and a hard-place. We must both address our unemployment and economic weakness now and yet be fiscally responsible.

If Congress considers the extenders legislation, they should adopt provisions both to address our immediate economic weaknesses (including the extension of unemployment insurance, which would have a large bang for the buck in multiplier terms) and to pay for the spending in a fiscally responsible way that does not weaken the economy. One option is to adopt measures to pay for the legislation over a longer period of time, as we have suggested here. Best would be to adopt the measures in the context of a medium-term fiscal recovery package, which would also include a sensible mix of fiscal consolidation measures putting our fiscal house in order when the economy is on a surer footing. Such a package could be adopted soon, but implemented over time.

Either way, we now live in a paygo world – whether something is labeled an emergency, exempt from paygo, or not – it needs to be paid for. Otherwise, we risk destabilizing credit markets when we need rates to stay low to help the economic recovery. In taking any new fiscal measures, we must make sure that they have credibility both to our financiers - the American taxpayer and the financial markets.